Round-up: Crypto Hedge Funds Attract Billions in Investment

The number of crypto hedge funds have seen an enormous growth in 2017. 100 new hedge funds have opened this year alone – around 80% of all crypto hedge funds in existence. Nasdaq analytics firm eVestment estimates that traditional hedge funds in 2017 have been able to generate an average Year-To-Date return of approximately 7.2% which pales in comparison to the massive returns crypto has been able to give its clients.

Cryptocurrency investment trust is for investors that want to gain an exposure to a price movement through a traditional investment vehicle without the challenges of buying, storing, and safekeeping the cryptocurrency.

Cryptocurrency hedge funds are estimated to manage between $2 and $3Bn in assets but aspiring to manage $8Bn. Autonomous Next is the only research provider that maintains a crypto hedge funds database. By their definition, hedge funds include conventional hedge funds, VC funds, investment funds and crypto indexes but exclude investment vehicles that package exposure to a single cryptocurrency. Diar looks at 30 of the largest and most well-known investment vehicles that are investing exclusively in crypto assets. These funds manage a total of $2.5Bn and more than 55% of them were opened this year. Only 40% of these would be considered or call themselves hedge funds.

The largest investment vehicle in the crypto space is currently Grayscale’s Bitcoin Investment Trust with $1.08Bn assets under management and 740% YTD while charging a 2% annual fee. Grayscale also runs an Ethereum Classic and Zcash Investment Trust with $37.6Mm and $12.9Mn of assets under management respectively.

The value of the two largest cryptocurrencies, Bitcoin and Ethereum, has risen by 770% and 5500% in 2017 respectively. According to Mangrove Capital Partners, the value of all visible ICOs have increased by 1220% in 2017 including a large number of projects that failed. Thus it is easy to see why so many of new funds started appearing in the crypto space.

Unlike mutual funds, hedge funds’ leverage is not capped by regulators, they are not as protective to the investors and some are not even required to register with the SEC. Most of the hedge funds charge an annual management fee of 2% and an incentive fee of anywhere between 10-20% of profits. Therefore, hedge funds must promise a great prospect of making large returns by leveraging risky investments.

The crypto hedge funds are putting money in either crypto assets, promising blockchain companies or a combination of both while employing a diverse mix of strategies. Some utilize buy-and-hold strategies and others are actively managed. The largest conventional hedge fund that invests in blockchain assets, Polychain Capital, was started by the first employee of Coinbase, Olaf Carlson-Wee. Mr Carlson-Wee started the hedge fund in July of 2016 and now has approximately $200Mn of assets under management.

In September of 2017, billionaire and a former hedge fund manager Michael Novogratz, announced that he is starting a $500 million cryptocurrency hedge fund, in which he has a personal vested interest to the tune of $150Mn. Novogratz believes that the cryptocurrency space “is going to be the largest bubble of our lifetimes” and he is planning to make money on the rise in the prices.

Blockchain Capital, a venture firm based in San Francisco, started specializing on crypto projects in 2013. Since then, they have invested in more than 40 companies such as Coinbase, Blockcypher, Blockstream, Kraken, Ripple, Shapeshift, Xapo and many other industry leaders. In April, Blockchain Capital raised $10Mn of funding through an ICO in only six hours.

Number of New Cryptocurrency Hedge Funds Per Year

Source: Autonomous NEXT

Logos Fund, based in Germany, started a fund dedicated to investing in blockchain mining. The Logos Fund was started by Marco Streng who is a founder of the largest cloud Bitcoin mining company Genesis Mining. Streng said that the largest advantage is that the fund is profitable even when Bitcoin’s price is declining. A hedge fund BitSpread, which is based in London, also generates returns that are independent to price developments. The hedge fund utilizes the price disparities between the cryptocurrency exchanges. BitSpread gained about 80% from January to September. It currently holds more than $25Mn in assets.

Pollinate Capital, which already manages $100Mn of assets in their hedge fund, will utilize quantitative trading methods along with conventional short and long trading. Matthew Goetz, a former Goldman Sachs VP, co-founded BlockTower Capital, which is an investment fund with $50Mn in assets. BlockTower Capital utilizes an active trading strategy, which engages in trades in reaction to events such as forks or major announcements. Grasshopper Capital, a hedge fund with about $25Mn in assets, uses a similar strategy of event-driven arbitrage but also algorithmic trading and conventional trading.

Target Coin and Taas are both decentralized crypto investment funds that raised money through an ICO. Target Coin is based in India and raised $20Mn. Target Coin uses machine learning and quantitative arbitrage strategies. It is built on profit sharing smart contracts where each quarter, all the investors receive 85% of the generated profits. Taas is a fund based in Ukraine designed to reduce the risks and technical barriers of investing in the blockchain space. It also allows the token owners to collect 50% of quarterly earnings though smart contracts. Out of the 30 investment vehicles, 9 of the funds utilized some sort of fundraising through ICOs.

Only a few of the largest and most well-known funds actually disclosed their yearly returns. The claimed highest disclosed yearly return was 2,280% by Cyber Capital. Cyber Capital is a smaller fund founded by Boudewijn Rooseboom in the Netherlands. It utilizes a long-term, buy and hold strategy in investing in cryptocurrencies and focuses on those that provide utility to its users. Because the minimum investment amount is € 100,000, the fund therefore falls outside the supervision of regulators.

As long as the crypto assets continue to increase in value, hedge funds and other investment vehicles will continue to appear. Cryptocurrencies present a great opportunity for hedge fund managers to collect the hefty incentive fees without actually exposing themselves to high risk and unpredictability of the crypto market. Hedge funds and other investment vehicles decrease the technical barriers of investing in cryptocurrencies, which is driving the capital that is being invested into crypto assets and could be one of the reason of this years bull run. The question is whether a growth like this can be sustainable in long term.

Top 30 Crypto Investment/Hedge Funds By Value of Assets Under Management

Name

Started

Funding est.

Type

Country

Description

Grayscale

2013

$1,128,500,000

Investment trust

USA

Bitcoin, Ethereum Classic and ZCash Investment Trust

Polychain

July, 2016

$200,000,000

Hedge Fund

USA

Actively managed portfolio of these blockchain assets

Galaxy Digital Assets Fund

September, 2017

$150,000,000

Hedge Fund

USA

Cryptocurrencies, token sales and related startups

Blueyard

January, 2016

$120,000,000

VC fund

Germany

Early Stage Blockchain ventures

Logos Fund

March 2016

$100,000,000

Investment Fund

Germany

Cryptocurrency mining fund

Pollinate Capital

April 2017

$100,000,000

Hedge Fund

USA

Algorithmic trading of cryptocurrencies

BB Fund

June, 2016

$100,000,000

VC fund

Singapore

Fintech, blockchain and tokenized assets

Blockchain Capital

October, 2013

$95,000,000

VC fund

USA

Investing in blockchain technology companies

Metastable

2014

$70,000,000

Hedge Fund

USA

Long-term focused blockchain investment

Pantera

2013

$55,000,000

Investment Fund

USA

Investing in blockchain technologies

BlockTower Capital

August, 2017

$50,000,000

Investment Fund

USA

Active trading strategy reacting to events

ConsenSys Ventures

September, 2017

$50,000,000

VC fund

USA

Blockchain projects with social and environmental inclinations

Tezos

August, 2017

$50,000,000

Platform Fund

USA/Switzerland

Venture capital funding to companies looking to build on the Tezos platform

BlockStack

August 2017

$25,000,000

Platform Fund

USA

Facilitate the partnerships that will result in quality app development on the Blockstack platform

Streamlining the blockchain imvesting process and establishing a network to vet ICOs

Crypto Asset Fund

June, 2017

$10,000,000

Hedge Fund

USA

Five classes of shares with different investment strategies

Cyber Capital

April, 2016

$8,200,000

Investment fund

Netherlands

Invests exclusively in cryptocurrencies that provide utility to its users

Taas

February 2017

$7,600,000

Investment Fund

Ukraine

Tokenized closed-end fund dedicated to blockchain assets

Astronaut Capital

September, 2016

$2,300,000

Asset manager

Singapore

Asset manager specialising in the research and investment of cryptocurrencies

Source: Diar

Revolut to Use GDAX, Bitstamp as Underlying Exchanges

Fintech start-up Revolut is launching a limited closed public beta program for trading cryptocurrencies this week on their popular mobile banking wallet. Lewis Tuff, Lead Platform Engineer tells Diar that Revolut is only a few short weeks away from offering all its user base three of the major cryptocurrencies.

UK mobile banking firm Revolut has grown its user base to an impressive 1 Million users since its launch in 2015 and is now gunning to grow to 10 Million. The fintech start-up found success in offering a simple and cost-effective solution for people to exchange their funds into different currencies instantly at very competitive rates with no fees. Revolut also offers a contactless MasterCard were people can spend anywhere in the world, using funds from their wallet.

In August, Revolut discussed that the “neobank” was working on offering cryptocurrencies on their exchange platform – Bitcoin, Ethereum and Litecoin on top of their current offering of 25 fiat currencies. Bringing the controversial digital currencies to their platform had to address possible future concerns from British regulators who have yet to setup a legal framework around cryptocurrencies. To minimize its risk and exposure of potential problems, Mr Tuff tells us that Revolut is going to be working with established exchanges GDAX and Bitstamp who have met the legal requirements in the US and Luxembourg.

“Our decision to launch with these two partners was driven out of regulatory adherence, licensing, liquidity and funding. We would definitely like to offer cryptocurrency services beyond EEA, and this is something we are actively working on.” Mr Tuff said.

Revolut will be charging a 1.5% mark-up on cryptocurrency exchanges. While both the exchanges that Revolut has partnered with have much lower fees on their professional platforms, the banking mobile app is closer to the easy, non-technical offerings such as Coinbase (which owns GDAX) who charge a whopping 4%.

Revolut will allow for exchanges between the three cryptocurrencies directly into one another as well as the other 25 fiat currencies, making it one of the most diverse fiat/crypto exchanges on the market today.

And while this will bring easy exposure for users into cryptocurrencies, the mobile bank will actually be the guardians of the keys and transfers outside the Revolut userbase will not be possible.

However, Mr Tuff has said in a presentation on the 24th November, that this is phase 1 of the program and the company will be working on allowing transfers, and the loading of funds, which will also not be possible at the start, with cryptocurrencies.

Mr Tuff has told us that the three cryptocurrencies will be available for people to exchange in the first week of December.

European Payment Council Rolls Out Instant Cross-Border Payments

The European Payments Council (EPC) has announced that the awaited SEPA Credit Transfer Instant (SCT Inst) which will allow fast cross-border payments within the Single Euro Payment Area (SEPA) members has gone live.

The EPC announced that the new SCT Inst, an initiative that started in 2016, has gone live in eight of the thirty-four SEPA European country members. At launch, 585 Payment Service Providers (PSPs) will support the new protocol that required an infrastructure overhaul to participate in the program and adhere to the new rulebook. Close to 1000 PSPs have signaled that they will be ready in 2018 (See Chart).

SCT Inst promises to deliver cross-border payments with the European Union, should all countries come into the program, in less than 10 seconds. The system will operate 24 hours, 7 days a week, all year round. This emulates modern money transmission services such as PayPal, while the current SEPA transfers take up to a day to clear.

The success of SCT Inst however lies on the PSPs that decide to join undertaking the cost of upgrading their systems; participation in SCT Inst is optional. In an interview with Banking Tech, EPC Chair Javier Santamaria was confident this wouldn’t be a problem and that the market requirements and people’s expectations will eventually bring everyone into the fold. One of the current limitations of SCT Inst is a €15,000 sending limit. The concern that has been raised is that this limitation may not satisfy business clients.

Countries, Payment Service Providers Ready For SCT Inst at Launch

Source: European Payments Council

Mr Santamaria has clarified however that the initiative will be under continuous review in order to address the success of the program.

Fees

The fees structure for the service is left up to the devises of each PSP. Dutch ABN Amro for example, will not charge extra for their private clients while Italian bank Intesa Sanpaolo has said they will be charging a fixed fee of €1.6.

EU Bank Failure Burden Remains on National Guarantee Schemes

With the European Deposit Insurance Scheme (EDIS) proposal all but scrapped, the European Central Bank (ECB) released an opinion proposal on the restructuring of framework for bank crisis management should it find itself in a precarious position. The proposal seeks to allow ailing banks to set withdrawal limits to avoid any possible bank-runs and maintains that the national guarantee schemes that are financed by levies on local bank should carry the burden of failure.

The current EU rules in place to protect depositors €100,000 was a provision that was implemented to build trust in the banking sector following the great financial crisis. The deposit guarantee is not an insurance scheme paid out by the coffers of the ECB, but by national governments who have been mandated by the EU to protect depositors.

The lack of a Pan-European deposit protection scheme has been put an obstacle for a real banking union. However, this EDIS proposal is being dismissed by many stronger economies in the Euro block stating that the healthier banks within the EU would be forced to foot the bill for the weaker ones.

Bundesbank president, Jens Weidmann, who Berlin wish to see take over from current ECB president Mario Draghi, said that “banks in the euro area have a sizable share of sovereign bonds on their books. To insure euro-area bank risks in such a situation would be tantamount to insuring fiscal risks. Given that the member states themselves still decide freely and independently on the level of government expenditure and taxes, this ultimately sets the wrong incentives: finance ministers would see less of a need to pay adequate attention to the sustainability of public finances.”

Mr Draghi, who has been tight lipped on the matter, has agreed with Mr Weidmann in this position stating that unless banks resolve their Non-Performing Loans (NPLs), the risk would then effectively fall on the stronger banks (meaning, mainly Germany).

An article that has circulated on Zero Hedge, and some Bitcoin news outlets have suggested that the ECB proposal aims to cut covered deposits. However, a closer look at the proposal, suggests that this would actually only happen “if the scope of the moratorium power does not include covered deposits.”

% of Europeans who completely trust their primary financial institution

Source: EY (2016 Survey)

The explanation continues by arguing that such a position on covered deposits in a moratorium would actually make a bank run more likely instead of preventing one as it would indicate that a bank is actually about to fail.

In order to minimize the pressure then on the national guarantee scheme, the ECB has proposed that certain capital controls could be placed by the banks. The fine print states that “during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request.”

Considering the dwindling faith in the banking institutions however (see chart) such a proposal should it pass into law, can further push people to invest in cryptocurrencies such as Bitcoin which cannot be controlled by anyone. And with the possibility of cryptocurrencies being liquid albeit volatile, (see Revolut story above) people may see this as better than to request for permission to access money on the back of a banks failure, and the lack of proper regulatory oversight from central banks.

Swissquote Bank Aims To Mute Volatility With Bitcoin ETP

Swissquote Bank has launched an Exchange Traded Product certificate that’s aim is to reduce the potential day-to-day swings that Bitcoin experiences. The certificate is split between 60% Bitcoin, and the remainder in US Dollars. Should the banks prediction algorithms detect potential upswings, it would flip between the cryptocurrency and the greenback.

But 10 days into its inception on 17 November, the ETP named “Bitcoin Active Certificate” has made a return of a 3.27%, while Bitcoin itself experienced a whopping 23% increase in the same period at the time of writing. This indicates that while the ETP reduces risk, it also reduces the reward quite significantly.

TOBAM Launches Unregulated Bitcoin Mutual Fund

Institutional investors of Paris-based TOBAM will be able to expose themselves to Europes first (unregulated) Bitcoin Mutual Fund. The investment firm that currently has approximately $10Bn Assets Under Management made the announcement on 22 November.

French regulators have required TOBAM to adhere to European mutual fund structure liquidity requirements, but have label the Bitcoin product as an Alternative Investment Fund.

According to the Financial Times, "PwC is the fund’s auditor and Caceis, Crédit Agricole’s asset-servicing banking group, is its custodian"